Loans and Allowance for Loan Losses

General

Loans held for investment are stated at the principal amounts outstanding adjusted for purchase premiums/discounts, deferred net loan fees and costs, and unearned income. We report our loan portfolio by segments and classes, which are disaggregations of portfolio segments. Our portfolio segments are: Commercial and agricultural, Real estate, and Consumer loans. The Commercial and agricultural loan and Consumer loan portfolios are not further segregated into classes. The classes within the Real estate portfolio segment include Real estate - construction and Real estate - mortgage, which is further broken into 1-4 family residential mortgage and Commercial real estate mortgage loans.

Loan fees and the incremental direct costs associated with originating a loan are deferred and subsequently recognized over the life of the loan as an adjustment to interest income.

In addition to originating loans, we also purchase loans. At acquisition, purchased loans are designated as either purchased contractual loans ("PC loans") or purchased impaired loans ("PI loans"). PC loans are acquired loans where management believes it is probable that it will receive all principal as of the date of acquisition. These loans are accounted for under the contractual cash flow method, under ASC 310-20. Any discount or premium paid on PC loans is recorded in interest income using the effective yield method over the expected life of the loans.

PI loans are acquired loans whose purchase price has been discounted, in part, due to credit deterioration occurring subsequent to origination. Accordingly, management believes it is probable that all contractual principal and interest on these acquired loans will not be received. PI loans are placed in homogeneous risk-based pools where accounting for projected cash flows is performed, as allowed under ASC 310-30. Once a pool is established the individual loans within each pool do not change. As management obtains new information related to changes in expected principal loss and expected cash flows, by pool, we record either an increase in yield when new expected cash flows increase, an allowance for loan losses when new expected cash flows decline, or a decrease in yield when there is only a timing difference in expected cash flows.

Loans acquired in the Merger ("Granite Purchased Loans") included PI loans and PC loans. Loans designated as PC loans included performing revolving consumer and performing revolving commercial loans on the acquisition date.

The following table presents an aging analysis of accruing and nonaccruing loans as of March 31, 2015:



(dollars in thousands)	Accruing
	30-59 days past due		60-89 days past due		More than 90 days past due		Nonaccrual		Total past due and nonaccrual		Current and accruing		Total Loans
PC and Originated Loans
Commercial and agricultural	$	357	$	—	$	—	$	515	$	872	$	107,920	$	108,792
Real estate - construction	—		211		—		1,022		1,233		72,837		74,070
Real estate - mortgage:
1-4 family residential	1,491		26		—		8,856		10,373		649,407		659,780
Commercial	—		—		—		9,410		9,410		352,209		361,619
Consumer	680		116		—		452		1,248		81,140		82,388
Total	2,528		353		—		20,255		23,136		1,263,513		1,286,649
PI loans
Commercial and agricultural	14		—		2,178		—		2,192		4,649		6,841
Real estate - construction	—		—		1,618		—		1,618		7,037		8,655
Real estate - mortgage:
1-4 family residential	481		—		1,966		—		2,447		13,882		16,329
Commercial	404		—		13,055		—		13,459		63,030		76,489
Consumer	2		—		9		—		11		937		948
Total	901		—		18,826		—		19,727		89,535		109,262
Total Loans	$	3,429	$	353	$	18,826	$	20,255	$	42,863	$	1,353,048	$	1,395,911

The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2014:



(dollars in thousands)	Accruing
	30-59 days past due		60-89 days past due		More than 90 days past due		Nonaccrual		Total past due and nonaccrual		Current and accruing		Total Loans
PC and Originated Loans
Commercial and agricultural	$	—	$	—	$	—	$	608	$	608	$	105,269	$	105,877
Real estate - construction	100		—		—		2,307		2,407		66,723		69,130
Real estate - mortgage:
1-4 family residential	2,719		147		—		8,637		11,503		638,364		649,867
Commercial	105		141		—		13,381		13,627		325,356		338,983
Consumer	744		225		5		355		1,329		69,760		71,089
Total	3,668		513		5		25,288		29,474		1,205,472		1,234,946
PI loans
Commercial and agricultural	—		—		2,232		—		2,232		5,303		7,535
Real estate - construction	—		—		3,737		—		3,737		5,460		9,197
Real estate - mortgage:
1-4 family residential	579		15		2,209		—		2,803		14,934		17,737
Commercial	287		119		12,964		—		13,370		73,975		87,345
Consumer	2		—		10		—		12		1,016		1,028
Total	868		134		21,152		—		22,154		100,688		122,842
Total Loans	$	4,536	$	647	$	21,157	$	25,288	$	51,628	$	1,306,160	$	1,357,788

All PI loans are considered to be accruing for all periods presented, in accordance with ASC 310-30.

Risk Grades

The risk-grade categories presented in the following table, which are standard categories used by the bank regulators, are:

Pass - Loans categorized as Pass are higher quality loans that have adequate sources of repayment and little risk of collection.

Special Mention - A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard loans, does not have to exist in individual assets classified Substandard.

Doubtful - A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors, which may work to the advantage of strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

Loans categorized as Special Mention or worse are considered Criticized. Loans categorized as Substandard or Doubtful are considered Classified. Purchased loans acquired in the Merger are recorded at estimated fair value on the date of acquisition without the carryover of related ALL. The table below includes $24.5 million and $27.0 million in Granite Purchased Loans categorized as Substandard or Doubtful at March 31, 2015 and December 31, 2014, respectively.

The following table presents loans held for investment balances by risk grade as of March 31, 2015:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	106,767	$	6,093	$	2,773	$	—	$	115,633
Real estate - construction	75,226		2,205		5,294		—		82,725
Real estate - mortgage:
1-4 family residential	655,673		5,199		15,237		—		676,109
Commercial	385,425		21,357		30,960		363		438,105
Consumer	82,537		10		474		318		83,339
Total	$	1,305,628	$	34,864	$	54,738	$	681	$	1,395,911

The following table presents loans held for investment balances by risk grade as of December 31, 2014:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	104,165	$	6,318	$	2,930	$	—	$	113,413
Real estate - construction	68,995		2,411		6,921		—		78,327
Real estate - mortgage:
1-4 family residential	646,897		5,363		15,342		—		667,602
Commercial	363,267		25,715		36,984		362		426,328
Consumer	71,350		11		376		381		72,118
Total	$	1,254,674	$	39,818	$	62,553	$	743	$	1,357,788

Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net loan premiums of $3.0 million and $2.8 million at March 31, 2015 and December 31, 2014, respectively.

At March 31, 2015 and December 31, 2014, loans held for sale consisted of originated residential mortgage loans held for sale carried at the lower of cost or fair market value.

Loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of loans serviced for others amounted to $246.9 million at March 31, 2015 and $235.0 million at December 31, 2014.

Loans Pledged

To borrow from the FHLB, members must pledge collateral to secure advances and letters of credit. Acceptable collateral includes, among other types of collateral, a variety of residential, multifamily, home equity lines and second mortgages, and commercial loans. Gross loans of $121.4 million and $123.1 million of investment securities, and gross loans of $127.2 million and $124.6 million of investment securities, were pledged to collateralize FHLB advances and letters of credit at March 31, 2015 and December 31, 2014, respectively, of which there was $126.2 million and $130.8 million of credit availability for borrowing, respectively. At March 31, 2015, $5.3 million of loans and $47.8 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $51.7 million was available as borrowing capacity. We could also access $246.0 million of additional borrowings from the FHLB under credit lines by pledging additional collateral.

Nonaccruing and Impaired Loans

Interest income on loans is calculated by using the interest method based on the daily outstanding balance. The recognition of interest income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectability cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. The past due status of loans is based on the contractual payment terms. Had nonaccruing loans been on accruing status, interest income would have been higher by $0.8 million and $1.0 million for the three months ended March 31, 2015 and March 31, 2014, respectively. At March 31, 2015 and December 31, 2014, COB had certain impaired loans of $20.3 million and $25.3 million, respectively, which were on nonaccruing interest status.

All loan classes are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. When we cannot reasonably expect full and timely repayment of a loan, the loan is placed on nonaccrual.

All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient information to conclude that the loan is well secured and in the process of collection. A debt is "well-secured" if collateralized by liens on or pledges of real or personal property, including securities, which have a realizable value sufficient to discharge the debt in full, or by the guarantee of a financially responsible party. A debt is "in process of collection" if collection is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action that are reasonably expected to result in repayment of the debt or its restoration to a current status.

Loans that are less than 90 days delinquent may also be placed on nonaccrual if deterioration in the financial condition of the borrower has increased the probability of less than full repayment.

At the time a loan is placed on nonaccrual, all accrued, unpaid interest is charged off, unless repayment of all principal and presently accrued but unpaid interest is probable. Charge-offs of accrued and unpaid interest are charged against the current year's interest income and not against the ALL.

For all loan classes, a nonaccrual loan may be returned to accrual status when we can reasonably expect continued timely payments until payment in full. All prior arrearage does not have to be eliminated, nor do all previously charged off amounts need to have been recovered, but the loan can still be returned to accrual status if the following conditions are met: (1) all principal and interest amounts contractually due (including arrearage) are reasonably assured of repayment within a reasonable period; and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms involving payments of cash or cash equivalents.

For all classes within all loan portfolios, cash receipts received on nonaccrual loans are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income.

For all loan classes, as soon as any portion of a loan becomes uncollectible, the loan will be charged down or charged off as follows:


•	If unsecured, the loan must be charged off in full.


•	If secured, the outstanding principal balance of the loan should be charged down to the net liquidation value of the collateral.

Loans are considered uncollectible when:


•	No regularly scheduled payment has been made within four months and the determination is made that any further payment is unlikely, or


•	The loan is unsecured, the borrower has filed for bankruptcy protection and there is no other (guarantor, etc.) support from an entity outside of the bankruptcy proceedings.

Based on a variety of credit, collateral and documentation issues, loans with lesser degrees of delinquency or obvious loss may also be deemed uncollectible.

A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. If the loan has been modified to provide relief to the borrower, the loan is deemed to be impaired if all principal and interest will not be repaid according to the original contract.

When a loan has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, we recalculate the impairment and appropriately adjust the specific reserve. Similarly, if we measure impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan, we will adjust the specific reserve if there is a significant change in either of those bases.

When a loan is impaired and principal and interest is in doubt when contractually due, interest income is not recognized. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.

The following table summarizes information relative to impaired loans for the dates indicated:



	March 31, 2015				December 31, 2014
(dollars in thousands)	Recorded Investment		Associated Reserves		Recorded Investment		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,603	$	—	$	4,967	$	—
Impaired loans, individually reviewed, with no impairment	22,134		—		26,631		—
Impaired loans, individually reviewed, with impairment	7,550		364		7,851		418
Total impaired loans, excluding purchased impaired *	$	34,287	$	364	$	39,449	$	418

Purchased impaired loans with subsequent deterioration	$	105,662	3,194		$	118,701	3,237
Purchased impaired loans with no subsequent deterioration	$	3,600	—		$	4,141	—
Total Reserves			$	3,558			$	3,655

Average impaired loans calculated using a simple average	$	36,868			$	43,446



* Included at March 31, 2015 and December 31, 2014 were $14.0 million and $14.1 million, respectively, in restructured and performing loans.

The following table presents loans held for investment on nonaccrual status by loan class for the dates indicated:



(dollars in thousands)
	March 31, 2015		December 31, 2014
Loans held for investment:
Commercial and agricultural	$	515	$	608
Real estate - construction	1,022		2,307
Real estate - mortgage:
1-4 family residential	8,856		8,637
Commercial	9,410		13,381
Consumer	452		355
Total nonaccrual loans	20,255		25,288
Loans more than 90 days delinquent, still on accrual	—		5
Total nonperforming loans	$	20,255	$	25,293

There were no loans held for sale on nonaccrual status as of March 31, 2015 or December 31, 2014.

The following table presents individually reviewed impaired loans and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding allowance for loan losses as of March 31, 2015:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	444	$	493	$	—
Real estate - construction	1,262		1,582		—
Real estate - mortgage:
1-4 family residential	7,852		9,761		—
Commercial	12,576		18,092		—
Consumer	—		—		—
Total	22,134		29,928		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,738		4,305		353
Commercial	3,812		3,984		11
Consumer	—		—		—
Total	7,550		8,289		364
Total individually reviewed impaired loans:
Commercial and agricultural	444		493		—
Real estate - construction	1,262		1,582		—
Real estate - mortgage:
1-4 family residential	11,590		14,066		353
Commercial	16,388		22,076		11
Consumer	—		—		—
Total	$	29,684	$	38,217	$	364

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	6,841	$	5,521	$	239
Real estate - construction	8,112		9,234		783
Real estate - mortgage:
1-4 family residential	13,272		14,078		240
Commercial	76,489		78,403		1,744
Consumer	948		621		188
Total	$	105,662	$	107,857	$	3,194

The following table presents individually reviewed impaired loans, and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding allowance for loan losses as of December 31, 2014:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	—	$	—	$	—
Real estate - construction	2,344		2,898		—
Real estate - mortgage:
1-4 family residential	8,115		10,238		—
Commercial	16,172		22,060		—
Consumer	—		—		—
Total	26,631		35,196		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	498		498		58
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,294		3,676		331
Commercial	4,059		4,228		29
Consumer	—		—		—
Total	7,851		8,402		418
Total individually reviewed impaired loans:
Commercial and agricultural	498		498		58
Real estate - construction	2,344		2,898		—
Real estate - mortgage:
1-4 family residential	11,409		13,914		331
Commercial	20,231		26,288		29
Consumer	—		—		—
Total	$	34,482	$	43,598	$	418
PI loans with subsequent credit deterioration:
Commercial and agricultural	$	7,535	$	6,149	$	257
Real estate - construction	8,619		9,855		507
Real estate - mortgage:
1-4 family residential	14,174		15,278		199
Commercial	87,345		90,830		2,085
Consumer	1,028		667		189
Total	$	118,701	$	122,779	$	3,237

The following summary presents individually reviewed impaired loans. Average recorded investment and interest income recognized on impaired loans, segregated by portfolio segment, is shown in the following tables as of March 31, 2015 and March 31, 2014:



	For Three Months Ended				For Three Months Ended
	March 31, 2015				March 31, 2014
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	478	$	—	$	242	$	—
Real estate - construction	1,276		11		2,688		10
Real estate - mortgage:
1-4 family residential	7,925		31		9,050		28
Commercial	13,081		73		21,503		89
Consumer	—		—		—		—
Total	22,760		115		33,483		127
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—		—
Real estate - construction	—		—		650		2
Real estate - mortgage:
1-4 family residential	3,744		19		3,829		19
Commercial	3,830		52		3,552		30
Consumer	—		—		—		—
Total	7,574		71		8,031		51
Total individually reviewed impaired loans:
Commercial and agricultural	478		—		242		—
Real estate - construction	1,276		11		3,338		12
Real estate - mortgage:
1-4 family residential	11,669		50		12,879		47
Commercial	16,911		125		25,055		119
Consumer	—		—		—		—
Total	$	30,334	$	186	$	41,514	$	178

Impaired loans also include loans for which we may elect to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and formally restructure due to the weakening credit status of a borrower. Restructuring is designed to facilitate a repayment plan that minimizes the potential losses that we otherwise may have to incur. If these impaired loans are on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans. Nonperforming restructured loans will remain as nonperforming until the borrower can demonstrate adherence to the restructured terms for a period of no less than six months and when it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring if the borrower is not past due at the time of restructuring, adequate collateral valuations support the restructured loans, and the cash flows of the underlying business appear adequate to support the restructured debt service. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. At March 31, 2015, there was $18.2 million in restructured loans, of which $14.0 million were accruing. At December 31, 2014, there was $19.4 million in restructured loans, of which $14.1 million were accruing.

Granite Purchased Loans

Granite Purchased Loans include PI loans and PC loans. PC loans consist of revolving consumer and commercial loans that were performing as of the acquisition date.

PI loans are segregated into pools and recorded at estimated fair value on the date of acquisition without the carryover of the related ALL. PI loans are accounted for under ASC 310-30 when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition we will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the date of acquisition may include statistics such as past due status, nonaccrual status and risk grade. PI loans generally meet our definition for nonaccrual status; however, even if the borrower is not currently making payments, we will classify loans as accruing if we can reasonably estimate the amount and timing of future cash flows. All Granite PI loans are presented on an accruing basis. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference.

Periodically, we estimate the expected cash flows for each pool of the PI loans and evaluate whether the expected cash flows for each pool have changed from prior estimates. Decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior provisions, or reclassification from non-accretable difference to accretable yield with a positive impact on future interest income. Excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

We have accounted for the Granite PI loans under ASC 310-30 and the Granite PC loans under ASC 310-20.

At March 31, 2015, and December 31, 2014, our financial statements reflected a Granite PI loan ALL of $3.2 million and $3.2 million, respectively, and an ALL for Granite PC loans of $0.4 million and $0.3 million, respectively.

The following table presents the balance of all Granite Purchased Loans:



	At March 31, 2015
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	6,841	$	1,187	$	8,028	$	6,727
Real estate - construction	8,655		—		8,655		9,815
Real estate - mortgage:
1-4 family residential	16,329		21,250		37,579		39,223
Commercial	76,489		—		76,489		78,403
Consumer	948		—		948		629
Total	$	109,262	$	22,437	$	131,699	$	134,797



	At December 31, 2014
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	7,535	$	4,288	$	11,823	$	10,508
Real estate - construction	9,197		—		9,197		10,463
Real estate - mortgage:
1-4 family residential	17,737		21,660		39,397		41,295
Commercial	87,345		—		87,345		90,830
Consumer	1,028		—		1,028		678
Total	$	122,842	$	25,948	$	148,790	$	153,774

The tables below include only those Granite Purchased Loans accounted for under the expected cash flow method (PI loans) for the periods indicated. These tables do not include PC loans, including Granite PC loans or purchased residential mortgage loan pools.



	For Three Months Ended						For Three Months Ended
	March 31, 2015						March 31, 2014
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	122,842		$	24,898		$	161,651		$	29,987
Accretion	2,048			(2,048		)	2,665			(2,665		)
Increase (Decrease) in future accretion	—			(1,925		)	—			1,005
Reclassification of loans and adjustments	—			—			(4,180		)	—
Payments received	(14,854		)	—			(11,081		)	—
Foreclosed and transferred to OREO	(774		)	—			(22		)	—
Subtotal before allowance	109,262			20,925			149,033			28,327
Allowance for loan losses	(3,194		)	—			(5,237		)	—
Net carrying amount, end of period	$	106,068		$	20,925		$	143,796		$	28,327

Allowance for Loan Losses

COB's ALL, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with our best estimate of probable loan losses to be incurred as of the balance sheet date. We assess our ALL quarterly. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. For purposes of the ALL, we have grouped our loans into pools with similar risk characteristics, including loan purpose, collateral type and borrower type. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. We also analyze the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While we use the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used.

Historical loss rates are calculated by associating losses to the risk-graded pool to which they relate for each of the previous eight quarters. Then, using a look back period consisting of the twenty most recent quarters, loss factors are calculated for each risk-graded pool using a simple average. This represents a change in methodology which began in the third quarter of 2013. Previously, we used a look back period beginning in the third quarter of 2006 and a weighted average of losses. The impact of this change was immaterial to the allowance calculation in the period we adopted the methodology change.

In addition to our ability to use our own historical loss data and migration between risk grades, we have a rigorous process for computing the qualitative factors that impact the ALL. A committee, independent of the historical loss migration team, reviews risk factors that may impact the ALL. Some factors are statistically quantifiable, such as concentration, growth, delinquency, and nonaccrual risk by loan type, while other factors are qualitative in nature, such as staff competency, competition within our markets and economic and regulatory changes impacting the loans held for investment.

We lend primarily in North Carolina. As of March 31, 2015, a large majority of the principal amount of the loans held for investment in our portfolio was to businesses and individuals in North Carolina. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by us in the determination of the adequacy of the ALL. We believe the ALL is adequate to cover estimated losses on loans at each balance sheet date.

During the three month period ended March 31, 2015, we charged off $1.0 million in loans and realized $0.8 million in recoveries, for $0.2 million of net charge-offs.

The ALL, as a percentage of loans held for investment, was 1.36% at March 31, 2015, compared to 2.13% at March 31, 2014. At December 31, 2014, the ALL, as a percentage of loans held for investment, was 1.50%.

An analysis of the changes in the ALL is as follows:



	For Three Months Ended
(dollars in thousands)	March 31, 2015			March 31, 2014
Balance, beginning of period	$	20,345		$	26,785
Recovery of losses charged to continuing operations	(1,137		)	(684		)
Net charge-offs:
Charge-offs	(994		)	(1,977		)
Recoveries	794			1,915
Net charge-offs	(200		)	(62		)
Balance, end of period	$	19,008		$	26,039
Annualized net charge-offs during the period to average loans held for investment	0.06		%	0.02		%
Annualized net charge-offs during the period to ALL	4.27		%	0.97		%
Allowance for loan losses to loans held for investment	1.36		%	2.13		%

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2015:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total

ALL:
Beginning balance January 1, 2015	$	3,915		$	3,163		$	5,847		$	4,179		$	3,241		$	20,345
Charge-offs	(49		)	(81		)	(125		)	(7		)	(732		)	(994		)
Recoveries	221			196			138			58			181			794
Provision (recovery of provision)	(689		)	(158		)	(237		)	(1,078		)	1,025			(1,137		)
Ending balance March 31, 2015	$	3,398		$	3,120		$	5,623		$	3,152		$	3,715		$	19,008

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2014:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:

Beginning balance January 1, 2014	$	2,931		$	5,233		$	8,869		$	7,195		$	2,557		$	26,785
Charge-offs	(389		)	(533		)	(484		)	(66		)	(505		)	(1,977		)
Recoveries	392			964			235			66			258			1,915
Provision (recovery of provision)	507			(356		)	(697		)	(229		)	91			(684		)
Ending balance March 31, 2014	$	3,441		$	5,308		$	7,923		$	6,966		$	2,401		$	26,039

The following table details the recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of impairment evaluation methodology at March 31, 2015:



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	—	$	—	$	353	$	11	$	—	$	364
Collectively reviewed for impairment	3,159		2,337		5,030		1,397		3,527		15,450
PI loans reviewed for credit impairment	239		783		240		1,744		188		3,194
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,398	$	3,120	$	5,623	$	3,152	$	3,715	$	19,008
Loans held for investment
Individually reviewed for impairment	$	444	$	1,262	$	11,596	$	16,387	$	—	$	29,689
Collectively reviewed for impairment	108,348		72,808		648,184		345,229		82,391		1,256,960
PI loans with subsequent credit deterioration	6,841		8,112		13,272		76,489		948		105,662
PI loans with no credit deterioration	—		543		3,057		—		—		3,600
Total loans	$	115,633	$	82,725	$	676,109	$	438,105	$	83,339	$	1,395,911



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	58	$	—	$	331	$	29	$	—	$	418
Collectively reviewed for impairment	3,600		2,656		5,317		2,065		3,052		16,690
PI loans reviewed for credit impairment	257		507		199		2,085		189		3,237
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,915	$	3,163	$	5,847	$	4,179	$	3,241	$	20,345
Loans held for investment
Individually reviewed for impairment	$	498	$	2,344	$	11,409	$	20,231	$	—	$	34,482
Collectively reviewed for impairment	105,380		66,786		638,456		318,752		71,090		1,200,464
PI loans with subsequent credit deterioration	7,535		8,619		14,174		87,345		1,028		118,701
PI loans with no credit deterioration	—		578		3,563		—		—		4,141
Total loans	$	113,413	$	78,327	$	667,602	$	426,328	$	72,118	$	1,357,788

Troubled Debt Restructuring

The following tables present a breakdown of troubled debt restructurings that were restructured during the three months ended March 31, 2015 and March 31, 2014, respectively, segregated by portfolio segment:



	For Three Months Ended March 31, 2015					For Three Months Ended March 31, 2014
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Investment		Investment		of Loans	Investment		Investment
Commercial and agricultural	—	$	—	$	—	1	$	11	$	11
Real estate - construction	—	—		—		—	—		—
Real estate - mortgage:
1-4 family residential	—	—		—		5	735		732
Commercial	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	—	$	—	$	—	6	$	746	$	743

During the three months ended March 31, 2015, we did not modify any loans that were considered to be troubled debt restructurings. During the three months ended March 31, 2014, we modified six loans that were considered to be troubled debt restructurings. We extended the terms for two of these loans and modified the interest rate for the remaining four loans.

There were no loans restructured in the twelve months prior to March 31, 2015 that went into default during the three months ended March 31, 2015. There were also no loans restructured in the twelve months prior to March 31, 2014 that went into default during the three months ended March 31, 2014.

In the determination of the ALL, management considers troubled debt restructurings and any subsequent defaults in these restructurings as impaired loans. The amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent.

Unfunded Commitments

The reserve for unfunded commitments, which is included in other liabilities, is calculated by estimating the probable amount of additional funding on the commitment and multiplying that amount by the historical loss rate (including Q&E factors). The following describes our method for determining the estimated additional funding by commitment type:


•	Straight Lines of Credit - Unfunded balance of line of credit (100% utilization)


•	Revolving Lines of Credit - Average utilization (for the last 12 months) less current utilization


•	Letters of Credit - 10% utilization

The reserve for unfunded commitments was $0.9 million as of March 31, 2015 and $0.8 million at December 31, 2014.